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IASB March 08 proposed amendments to IAS 19 A corporate view
Peter Zegger Head of Global Pensions, Unilever 2nd July 2008
Unilever Pension Plans (figures end 2007)
•
45 countries with funded company pension plans
•
Over 90 pension schemes with in excess of 300.000 members
•
Membership / Design – 126.000 active employees: 60% in DB plans, but clear move to DC. – However, huge deferreds (72,000) and pensioner (107,000) DB legacy
•
DB Pension deficit €1,1bn (IFRS-gross) – €18,3bn pension and healthcare liabilities, €17,2bn pension assets – Funded plans €1,2bn surplus – Unfunded plans €2,3bn (€0,8bn healthcare)
•
Pension liabilities are around 25% of Unilever’s market cap.
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IFRS base treatment
Pension items in Financial Statements In P&L •
Gross Service Costs actives
•
Interest charge on pension liability
•
Expected Investment returns
In OCI (‘actuarial gains & losses’) •
Movement in discount rates and inflation expectations
•
Difference Expected and Actual investment returns
•
Changes in mortality expectations
•
Experience Gains and Losses
Note: the financial impact of changes to benefit plans initiated by the company would also go via P&L
IFRS Corridor Option
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IFRS allows a company not to recognize the actuarial gains and losses if these are lower than 10% of obligations or assets (whichever is the higher).
•
If the cumulative unrecognized amount exceeds the 10% than the excess over 10% divided by the expected average working lives of employees needs to be recognized in P&L (e.g. amortization of excess over 15-20 years)
•
If the company uses the corridor it needs to disclose what amounts are left unrecognized and which part has been booked to P&L.
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Unilever decided not to use corridor •
Main reason: prime users of the accounts (analysts, rating agencies, sophisticated investors) will add unrecognized amounts to the net deficit (or suplus) in assessing the company’s balance sheet and risk (also to be able to compare risks between companies). So, no benefit in ‘hiding’ the amounts.
•
Other Considerations: – (Very) complex accounting – Would create a (further) gap between local fund accounting and group accounts (complex in company - trustee interactions, i.e. could create different risk perceptions). – Actuarial G&L would (partly) go through P&L rather than OCI.
Pension items in Financial Statements Unilever - 2007 € (3,1) bn
P&L
Gross Service costs actives
(0,3)
(0,3)
Interest on Liabilities
(1,0)
(1,0)
Investment returns
0,9
1,2
Change discount rates/inflation
1,4
1,4
Mortality expectations
(0,4)
(0,4)
Experience G&L
0,1
0,1
Other (mainly currency)
0,1
Gross pension deficit end 2006
Company contributions
OCI
(0,3)
0,1 1,2
1,2
Gross pension deficit end 2007
€ (1,1) bn
Movement
€ 2,0 bn
BS
(0,1)
0,8
1,3
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Initial views IASB (March 2008) I.
All changes in DB Liabilities and Assets via P&L: –
So, actual return on assets in stead of expected return on assets through P&L
–
Also impact of mortality changes, impact of discount rate and inflation change, plus experience G&L in the year through P&L
II. Only Service Costs for actives through P&L, however incl. changes related to mortality and experience G&L –
All other costs (incl. Interest and Return on Assets) through OCI.
III. Service costs (as II.) and interest cost on liabilities and interest income on assets (tbd) through P&L
Current IFRS compared to proposals NOW P&L
OCI
I P&L
II OCI
P&L
III OCI
Service Costs
(0,3)
(0,3)
Interest on Liabilities
(1,0)
(1,0)
(1,0)
(1,0)
Investment Returns
1,2
(0,3)
0,9
0,9
0,8
Change Disc/Infl
1,4
1,4
1,4
Mortality changes
(0,4)
(0,4)
(0,4)
(0,4)
Experience G&L
0,1
0,1
0,1
0,1
0,8
0,7
TOTAL
(0,1)
(0,3)
P&L
-
(0,6)
OCI
(0,3)
1,3
0,1 1,4
(0,8)
1,5
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Pensions in Fin Statements 2001-2007 current IAS19 EUR bn
2001
2002
2003
2004
2005
2006
2007
Change Deficit
(2,6)
(3,8)
0,5
(0,3)
(0,1)
2,4
2,0
In P&L Service Costs Interest Pensions Expected Return
(0,4) (0,4) (1,2) 1,2
(0,3) (0,4) (1,1) 1,2
(0,6) (0,4) (1,0) 0,8
(0,5) (0,4) (1,0) 0,9
(0,4) (0,4) (1,0) 0,9
(0,1) (0,1) (1,0) 1,0
(0,1) (0,3) (1,0) 1,2
In OCI Diff actual-exp return Change discount rate Mortality Experience G&L
(2,3) (2,3) (0,2) 0,2
(4,3) (3,3) (1,0) (0,1)
0,2 0,9 (0,6) (0,1)
(0,7) 0,4 (1,1) (0,0)
(0,1) 1,6 (1,3) (0,4) 0,0
1,1 0,5 0,7 (0,2) 0,1
0,8 (0,3) 1,4 (0,4) 0,1
0,1 0,1 -
0,8 0,4 0,4
0,8 0,4 0,4
0,9 0,8 0,1
0,4 0,8 (0,4)
1,3 1,0 0,3
1,3 1,2 0,1
In BS Contributions Other (mainly ccy)
Development Deficit 2001-2007 Current IAS19
Pensions Surplus end 2000
€ 1,1bn
P&L Gross Service Costs Interest on liabilities Expected return on assets
(2,3) (7,2) 7,3
(2,2)
OCI Actual less Expected return Change discount rate/inflation Mortality/Experience
(2,4) (2,4) (0,6)
(5,4)
BS
5,6 Company Contributions Currency movements
Pension Deficit end 2007
4,8 0,6 € (1,1) bn
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Current IFRS compared to proposals 2001-2007 net Profit Unilever
What is IASB trying to achieve with different presentation? Nothing Off Balance Sheet?
Agree. Get rid of corridor and deferral of actuarial G&L
More Transparency?
All info is already in financial statements. Pension disclosures in the R&A are extensive
Better understanding?
Same accounting, only in different sections of the Fin statements than currently. Go for stricter definitions, disclosures
IFRS consistency?
What about FX hedge accounting? What about valuation bonds issued? What about floating rate debt?
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What will IASB achieve with proposal I…. •
An income statement that does no longer reflect the operational performance of the business -> – How to interpret net profit figure? – What is basis for dividend pay-out? – What is basis for EPS? – Analysts will remove most, if not all, of the pension items from P&L in their valuation models
•
Inclusion of many non-cash items in P&L, resulting in net profit figure diverting even more from Cash
•
A substantial amount of short term volatility (maybe impacting share price valuations)
•
Inconsistency with accounting treatment of routine financing of the business.
Current IFRS compared to proposals II and III 2001-2007 net Profit Unilever
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comparing proposals II and III
Proposal II
Proposal III
Pros
- Focus on service costs only in P&L - No subjective imputed returns on assets
- Accounts for funding ratio in P&L
Cons
- Disregards funding ratio in P&L - Bias to lower funding?
- Introduces imputed interest in P&L - disregards asset allocation in P&L - is imputed interest on assets better than expected return?
Summary •
Disallowing the 10% corridor and deferral practice is probably the right thing to do as the corridor approach has no benefit in practice and is one of the reasons why IAS19 is perceived to be too complex.
•
Proposal I introduces full capital market volatility in P&L and does not lead to more transparency or better understanding and will require substantial more adjustments by analysts in assessing underlying business performance
•
Proposal II and III both have pros and cons, with slight preference for proposal II. However, none of these two are superior over the current standard, in my opinion.
Before IASB throws away the current standard, it needs to be clear on what issues it wants to address!
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In stead, what should IASB focus on? •
They should simply talk to the analysts (as main users of the accounts) to understand what info is currently lacking to make a good assessment of the risks involved in the pension activities.
•
Potential additional key disclosures: – Funding position of main plans (covering at least 50% of liabilities) – Strategic and/or Actual Asset Allocation – Value at Risk (e.g. 1yr 95%) split over interest rate risk, investment risk and currency/other risk – Detailed disclosure of mortality assumptions in main plans – Important (funding) agreements with Trustees of main plans – Management commentary on pension risk management strategy
So, rather than focusing on presentation issues (with subsequent ‘pollution’ of the income statement) focus should be on disclosures
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Managing pension liabilities or Managing accounting rules •André ten Damme, CFO APG Groep NV
RJ Bijeenkomst Pensioenen 2 juli 2008
Agenda •
Internationaal perspectief
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Belang Nederlandse pensioenstelsel
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IAS19: werking, kanttekeningen en gevolgen
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Suggesties voor aanpassing IAS19
2
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Kapitaalgedekte pensioenstelsels: klaar voor vergrijzing Privaat pensioenvermogen naar type vehikel Denemarken IJsland Nederland VS Zw itserland Canada VK Australie Finland Zw eden Ierland Japan Duitsland Portugal België Spanje Nieuw -Zeeland Mexico Polen Hongarije Oostenrijk Korea Frankrijk Noorw egen Tsjechië Italië Slow akije Turkije Griekenland Luxemburg 0
20
40
60
80
100
120
140
% BBP
Bron: OESO (2007)
Pensioenfondsen
Book reserves
Verzekeringscontracten
Anders
Kerncijfers pensioenfondsen 750 Nederlandse pensioenfondsen: • Belegd vermogen: € 725 mld • Financiële buffers: € 220 mld (44% verplichtingen) • Actieve deelnemers: 6,2 mln • Pensioenpremie: 16% van bruto loonsom 90 Bedrijfstakpensioenfondsen: • 5 grootste beheren € 400 mld • 2/3 werknemers bouwt pensioen op bij een bpf
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Voordelen Nederlands pensioenstelsel Breed draagvlak door sociale partners Hoge deelname (90% werknemers) Deskundig beheer Uitvoeringskosten pensioenverstrekkers Solidariteit tussen generaties Robuust Lage uitvoeringskosten! 30 25
% premie
• • • • • •
20 15 10 5 0
Pensioenfondsen
Verzekeraars
Bron: DNB Bron: DNB
Nederlands pensioenstelsel: van PSW naar PW Pensioenuitvoerder • juridisch & economisch zelfstandige entiteit grotere autonomie pf • neemt pensioenverplichting over van werkgever • verhoogde eisen toezichthouder Werkgever • verplicht tot betalen premie voor nieuwe opbouw • geen opeisbaar recht op overschotten • zelden aansprakelijk voor tekorten
Werknemer • verplichte deelname • verplichte bijdrage
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Effect sturingsmiddelen op dekkingsgraad Gegevens einde 2007 (mld euro) ABP
PFZW
PMT
Bouw
Vermogen Buffer Dekkingsgraad Premie OP/NP 2008
88.3 28.5 148% 22.5%
34.7 10.1 141% 26.0%
21.6 6.2 134% 14.9%
Premie +1%-punt Indexatie -1%-punt Rendement +1%
216.5 61.8 140% 19.8%
Effect sturingsmiddelen op dekkingsgraad 0.2% 0.3% 0.2% 0.2% 1.4% 1.5% 1.4% 1.3% 1.4% 1.5% 1.4% 1.4%
Premiestuur is ineffectief Herstelplannen sturen op indexatie en mix
De rigide werking van IAS19 • Risicoverdeling in driehoek bepalend voor DC of DB: – Risico werkgever nihil alleen dan DC – Niet zuiver DC per definitie DB
• Als DB – PUC methode (incl. toekomstige salarisontwikkeling en indexaties) – beleggingen en verplichtingen toerekenen aan werkgevers; – ook bij bpf
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Echter…de wereld is niet zwart-wit en uniform • IAS 19 is binair en is gebaseerd op veronderstellingen: • Bedrijf heeft control over pensioenfonds ! • Bij kapitaaldekking is wg-premie de enige bron van financiering ! • DB is final pay (en dus PUC) ! • Indexatie lijkt onvoorwaardelijk ! • Indien niet zuiver DC, dan DB ! • Bij overschot / tekort toerekenen aan werkgever; ook bij BPF !
IAS19 kan leiden tot zeer onrealistische balansposten
Een cijfervoorbeeld… FTK
IFRS
Vermogen Verplichtingen Eigen vermogen / funded status
135 100 35
135 140 -5
Premie / pension cost
3.6
3.6
Stel daling dekkingsgraad met 10% Vermogen Verplichtingen Eigen vermogen / funded status
134 107 27
134 150 -16
Premie Pension cost zonder smoothing Pension cost met smoothing
4.0
14.6 4.3
Conclusie: • IFRS leidt tot overschatting tekorten werkgever • Zonder smoothing: zeer grote volatiliteit in jaarrekening werkgever
Verondersteld: Basispremie gelijk aan reguliere IFRS-last Premiestaffel met 2%-opslag
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Toerekening aan werkgever bij BPF We willen wel, maar kunnen niet!
• Niet op betrouwbare wijze mogelijk:
– Kenmerken deelnemers (leeftijd, geslacht, gezondheid, instapmoment, burgerlijke staat, gezinssamenstelling) – Kenmerken bestand (verhouding actief / slaper / gepensioneerd) – Historie deelnemers (verschillende werkgevers) – Niet meer bestaande werkgevers
• IASB heeft dit onderkend
par 30/32 bij risicodeling!
• Druk accountants toch toe te rekenen bevreemdt ons Ze kunnen wel maar willen niet!
IAS19
verkeerde inzichten / besluiten
Opvoeren verplichtingen die feitelijk geen verplichtingen zijn Werkgevers kunnen gaan opteren voor DC-regelingen Geweldig Nederlandse pensioensysteem kan onderuit gaan Enthousiasme voor IFRS als geheel kan dalen
Overgang naar DC kan nadelig zijn voor deelnemer: • Duur • Groter risico op te laag pensioen
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Een vaktechnische oplossing: meerkleurige boekhoudregels G''n geconstrueerde verplichting obv veronderstelde risico’s, maar echte verplichtingen op balansdatum: 1 Alleen premieplicht: premie is last en geen pensioenverplichting 2 Meer dan premieplicht alleen: – Bij middelloon is toekomstige salarisstijging geen verplichting – Alleen indexatieverplichting bij concrete toezegging / besluit – Aandeel tekort: alleen indien plicht (bijv. contante waarde extra premies gedurende herstelplan) – Aandeel overschot: alleen indien recht 3 Par 30/32 pas bediscussiëren na goede werking nieuwe rules
Smoothing
• Smoothing verzacht rigiditeit IAS 19 enigszins • Pas discussie over ‘smoothing’ na goede behandeling van hybride pensioenregelingen!
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Hoe verder? •
Lobby NL moet verder gaan dan participeren werkgroep
•
Rechtstreekse beïnvloeding nodig door: – Overheid? – Big 4 / Nivra? – Raden van Bestuur Nederlandse bedrijven? – Pensioenfondsen? – Actuarissen? – DNB? – Sociale partners? – …
•
“Het kabinet zal ook voor 26 september a.s. een reactie geven op het genoemde discussiestuk van IASB.” Hiertoe zal kabinet zich laten informeren door belanghebbenden.
•
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Variable benefit plans and mandatory collective plans. •IAS 19 application problems in practice: how to resolve? •EAA congress 24 april 2008; Symposium Fundamentals of Pension Accounting Revised, and •RJ Symposium 2 juli 2008 •Presenter: Ralph ter Hoeven
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What is the problem? • In the Netherlands but as well in other parts of the world specific plans contain features of a variable benefit model or are liaised to state plans • IAS 19 db-accounting not well accepted; increasing resistance in market place • How to resolve: will plans or rules change? • And if latter: how should they change
©Deloitte 2007
Variable benefit plans: features • Actuarial and investment risk are shared but rest predominantly with (former) employees • Employer is not the (sole) subscriber of risks • Benefit formula based on current salary with conditional indexation rights • Funded both by employer and employee (shared funding)
©Deloitte 2007
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Variable benefit plans: features •Pension fund: independent, autonomous and required by law to act in the interest of all parties •Pension fund responsible for investment policy and asset mix •Pension fund responsible for terms of the plan •Contribution level should be sufficient to cover all expenses of yearly pension entitlements
©Deloitte 2007
Variable benefit plans: features • Pension fund responsible for taking measures in case of shortages • If indexation is conditional the lion’s share of risks rest upon the (former)employees / retirees • If foregoing of indexation is not enough, other measures can be taken by fund (pain should be divided amongst parties involved)
©Deloitte 2007
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Application problems •Db accounting starts from basis that employer is underwriting the actuarial and investment risks •Predominantly the plan participants bear the risk; indexation component of ultimate benefit is large •Perspective of management: –they have to pay a market based contribution to settle the earned benefits during the year –From then onwards: pension fund take ownership •The shift to cdc is not to reduce risks but to have accounting outcomes that reflects better the perceived substance of the plan arrangements ©Deloitte 2007
Mandatory collective plans • In NL: Industry wide pension funds • Features similar to variable benefit plans; three differences – employers are obliged (by law/collective labor agreement) to participate in the plan; – individual employers have no influence in terms and conditions of plan; – if employer leaves the plan (e.g. activities are shifting to another industry), no additional payments have to be made. ©Deloitte 2007
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Application problems • IAS 19: multi-employer plans – if db: employers shall account for its proportionate share of the obligations and assets of the plan – pension funds write letters that they consider the plans as dc and that they are not able to provide information that IAS 19 requires (proportioning) – Employers feel that they participate in a state plan; they have to pay premiums as required by collective agreement; they had no say in the design of the benefit promise
©Deloitte 2007
Proposed solution • For both plans: apply dc-accounting with extensive disclosure requirements about the position of the fund and the funding conditions/arrangements that exist • Users should be provided with information that enables them to evaluate nature and extent of risks arising from the sponsoring relationship with the fund • Conditions should be well described ©Deloitte 2007
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Basis for conclusions • Variable benefit plans: – Division of risks between employer / employees – Pension result is highly dependent on indexation; is the benefit defined or variable? – Funding based on actuarial value of earned benefits – Control and (majority) of risk & rewards are transferred from entity • Mandatory plans: – Similarity with state plans (IAS 19.38) – No control or influence – Obligating event is participation in the industry (comparable with approach IFRIC 6) ©Deloitte 2007
Finally:Relation with discussion paper IASB • Par 1.6 DP: criteria for scope of project 1. Issue causes current problems 2. There are alternative solutions to the problem that not fundamentally change current IAS 19 stipulations 3. The change would improve decision-usefulness of financial reporting • Conclusion: variable benefit and mandatory collective plans should be part of this project
©Deloitte 2007
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